Monday, February 22, 2010

That trick never works

For many, price controls may seem like a tempting solution to holding down health care costs. However, past attempts at price controls teach us a very different lesson�this is one government policy guaranteed to do more harm than good. In fact, throughout history, price controls have been a notorious flop, bringing on economic stagnation and decline, rationing, hoarding, black marketing and organized crime, assaults on civil liberties, and even inflation, not to mention untold waste, graft, and human suffering.

In fact, from Babylon�s King Hammurabi to presidents Richard Nixon and Jimmy Carter, the thirty-eight-century history of price controls is a recurring economics lesson for any modern Luddite seeking a quick fix to health care costs. For instance, after he and previous emperors had debased the currency, creating rampant inflation, the Roman emperor Diocletian set maximum prices on more than one thousand products and services. Goods disappeared in legal markets, and reluctantly consumers and producers turned toward black markets despite a penalty of death for participating in these markets. After much suffering and bloodletting of the unfortunate caught violating the law, the law was revoked and Diocletian abdicated.

Thus wrote Simon Rottenberg and David Theroux in 1994 when we last debated price controls in health care. Some of the stories they tell come from overseas with regards to health care:

price controls on drugs in Germany in 1993 led to one in five firms cutting hours for their workers within a year, and 30-50% of firms experiencing sharp declines in drugs ordered. Families were upset about the unwillingness of doctors to prescribe medicines they requested;

U.S. doctors were routinely advertising in Canadian newspapers, offering services that were cheaper in Canada ... but unavailable.

Price controls always lead to non-price rationing. If any of my students are reading, they will know my slogan -- all scarce goods get rationed somehow. If you aren't using price to ration, you can't say it isn't rationed, you just have to define the mechanism that does the rationing. The Fraser Institute's Waiting Your Turn annual survey is a measure of an alternative rationing mechanism called a queue, or first-come-first-served.

The Obama Administration's proposal leads to rationing of health insurance (or as Arnold Kling calls it, health insulation) that probably will not be on a queuing system. It creates a shortage, as any effective price control does. To provide the health insurance to others you will have government subsidies paid for by additional taxes. The growth-damaging effects of those additional taxes will not be recognized.

And as prices are reduced and people continue to be promised health care at near-zero marginal cost, insurance companies will slowly suffocate. Who will save us?